GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT

An issue of long standing concern to the Glass Pyramid is the role of the RBA within the Australian structure of economic management.

It is great to see one of the superior writers at Business Spectator and a former employee of the RBA show signs of really warming to this topic.  In an interesting post Callam Pickering discusses the recent speech made by the Governor contrasting the US and Australian economies and ruminates on whether the RBA may have a culture problem.

“…I know from personal experience that the RBA is rarely open to counter-views; unless you hold a management position your opinions are neither sought out nor taken seriously. The bank also rarely hires externally, creating a sense of group-think within lower and middle management.

 

The RBA is awash with talented people with towering intellects — economists who were more than capable of recognising the structural shifts at play across the Australian economy. Rather than playing the ‘human nature’ card, perhaps Stevens should be looking at how the internal culture at the RBA undermined monetary policy…”

 

The Glass Pyramid, always eager to help out anyone who is drawing attention to fundamental problems in our economy, offered some support when a commenter suggested those comments may just be sour grapes on the part of Mr Pickering.

That is exactly the kind of comment made in organisations to excuse group think. The most that can be said of the RBA is that it is executing its ‘mission’ of driving the economy on a rising mountain of private debt using bait rates – manipulated debt pricing. This mission is not inherent in its charter but the result of how the major parties have chosen to interpret it and wash their hands of responsibility for economic management. The sweat on the part of the govt reflects that this lazy attitude and shirking is no longer sustainable.

 

Like anything where a day to day lifestyle relies on expanding debt – the RBA mission is unsustainable.

You may call it a ‘good job’ but it has not been in the national interest.

 

Callam is right to call for a thorough review of the internal culture but a wider inquiry into the structure of our banking system and public finances is required.

The wider enquiry is required because the great dream since the mid 1990s was that a good government need never run a budget deficit ever again as long as the private sector (Households mostly) were prepared to run deficits and take onto their ‘private’ balance sheets the economy driving debt that the public sector wished to avoid like a vampire avoids garlic.

This mad vision depended on the dodgy idea that because households are rational economic actors (unlike politicians so the theory goes) they would know just how much debt was optimal for their circumstances and therefore the amount of private debt would not matter.  All of those individual optimal debt decisions would total an optimal debt position across the economy.

Of course the politicians (especially John Howard) loved this scheme as it meant that while the households were rushing down to see their Finance Broker and Bank Manager (after seeing ‘….equity maaaaaaaaate….’ commercials and episodes of reality renovation shows) and stimulating the economy with all that bank endogenously created loan money and fancy tapware, the pollies could sit back and claim to be “Economic Conservatives” who were frugal with the public purse.  In fact as John Howard found to his bliss and joy, if the households are expanding the money supply fast enough with their suburban dream make overs (driven by RBA bait rates) he could run a surplus merely by taking some steam out of the economy.

Well, as we are all starting to realise – private/household debt does matter and matters quite a lot.    The RBA is not cutting interest rates because it likes the sound of ZIRP. It is cutting rates for one reason only.  Households are so chock full of debt that the only way the RBA can stop the demand for debt from stagnating or collapsing is by driving down the price lower and lower.   A bit like Coke trying to improve sales of its sugary hit drink by cutting the price even as the population is going up belt sizes and burping that it has had enough.

And no surprise that the only people still taking the “..bait..” are those high pulse rate risk taking speculators who are betting/gambling that the RBA (and our conflicted investment property owning pollies see Boom to Bust blog.) will protect them right to the bitter end.  The poor RBA and APRA don’t know what to do – if they turn the risk taking nutters away from the punch bowl they may find the party (economy) stops on a dime. Especially with Frugal Joe and Tony promising they have not lost their desire for surpluses as fast as possible.

Which brings me back to the RBA.

Under this Household Debt model of economic management where the pollies have shirked their responsibility for economic management, the RBA has been given enormous power over the economy and it is not surprising that senior management in the RBA are paid up true believers in the economic theories that support such power.

It is hard to imagine how anyone could have been promoted within the RBA or remained in the organisation for long since the late 1990s, if they seriously questioned the idea that an economy can be sustainably run on rising levels of household debt driven by “bait rate” interest rate policy.

You can just imagine the reaction if some green young brainiac fresh from university raised a hand in a staff meeting and asked

” Why don’t we explain to the public (or the pollies) that trying to run the economy on an expanding level of household debt is unsustainable and that the pollies need to take more responsibility for economic management”

The response would probably have been “Don’t be a silly platypus…”

What is really interesting is that even the RBA senior management is starting to sniff the breeze and give some hints that it is losing faith in the way it (read the pollies, Treasury, RBA and APRA) has managed the economy for the last 20 years.

The speech by Phillip Lowe – questioned how much juice is left in monetary policy.

The speech by Glenn Stevens – did much the same with a not so subtle touch of   “….if you read carefully between the lines of our vague and Greenspan-like prose since 2005 we warned you…’  With utmost respect –  the Glass Pyramid disagrees Governor.

Even the RBA can sense the Household Debt Machine is blowing smoke and struggling to gain traction.

This is not going unnoticed – Mr Ross Gittins of the SMH, is also picking up the vibe judging from his weekend SMH columns over the last few weeks and this one.

Time for an inquiry that specifically looks at the model of economic management that involves the RBA (and APRA) managing the economy with monetary policy and household debt.